With More Downside Possible For Overvalued Stocks, Quality Matters More Than Ever…
When I checked in with my premium subscribers after the New Year, I warned that investors could be in for a “rude awakening”.
I mentioned that there were several red flags mounting, and that they shouldn’t be ignored. (I described some of them in an interview with my colleague Brad Briggs here.)
Since that issue went out to my premium readers (Jan. 5), the S&P 500 tumbled nearly 10%, the tech-heavy Nasdaq dropped 14%, and the Dow Jones Industrial Average fell 7%.
Some of the top technology stocks that were once market leaders were hit even harder. For instance, Shopify (NYSE: SHOP) fell as much as 43% in the last month, DocuSign (Nasdaq: DOCU) dropped nearly 60%, and Zoom (Nasdaq: ZM) lost 50% of its value over the last 30 days.
We’ve seen a few positive days in a row since then. And some of those names have clawed back a little bit. But I want to urge investors to be cautious about putting too much faith into this. While valuations have come down a bit for many of these high-flying tech stocks, I think there could still be more pain to come.
Some Important Perspective On This Market
I realize saying this may a little disconcerting for our readers. But it’s important to have some perspective…
I’m not necessarily calling for a full-blown market crash or anything like that. Also, remember that we’ve seen a lot worse. For example, back in early April 2020, when the market had tanked due to the Covid-19 pandemic, I checked in with readers with some sobering words.
In short, I told readers that it may get worse before it gets better:
Of course, nobody knows whether we’ve already reached the bottom in the market. Personally, I have a hard time believing that the market is already over the plunge in oil prices, the growing number of cases of COVID-19, and all the economic damage that will come out of the sudden halt of our economy.
Just last night, the President told Americans what to expect over the next couple of weeks. He said it would be “painful.”
In that piece, I went on to detail the economic damage that had been done – and said that there would likely be more to come. We all know what happened next. In that case, the bottom was already in place in the market. But there was indeed more economic (and human) suffering ahead.
But that didn’t matter. We didn’t have to call the exact bottom in order to make some truly fantastic gains in the market.
Fast-forward to today. We’re not even close to the same situation. My “red flags” for the market have more to do with overvalued stocks in a rising rate environment.
My point is, if we can handle the market tanking from a worldwide pandemic, we can handle a little correction. In fact, corrections are healthy. They keep valuations in check and wash out speculators before things get out of hand (in which case, we’d really be in trouble.)
What To Do Now…
If you still find yourself a little nervous about a correction, then you need to reevaluate the amount of risk you’ve taken with your portfolio.
Yes, we all want to score those big winners. We certainly plan on doing this over at Top Stock Advisor. In fact, that’s what our latest annual Predictions report is all about…
But we also want to be focusing, like Buffett, on adding wonderful companies trading at fair prices with the bulk of our portfolio.
I’ll give you an example of what this might look like…
Visa (NYSE: V) reported earnings on January 27 and saw shares jump double digits as the company topped earnings estimates. Quarterly revenue came in at nearly $7.1 billion, topping estimates calling for just shy of $6.8 billion, and earnings per share of $1.81 topped by 11 cents.
I think Visa — and Mastercard (NYSE: MA) too, for that matter — could have a nice year in terms of performance after a lackluster one last year. Visa continues to churn out free cash flow ($14.5 billion on its $25.1 billion in revenue). And it dominates the payment space.
Right now, Visa isn’t trading at a deep enough discount for me to say it is a screaming “buy,” but it’s also not trading at super-rich premiums, either. The stock trades for 38x earnings, which is in line with its historical five-year average.
So, if you did want to start (or add to) a position here, I wouldn’t blame you. I think the risk/reward setup at current prices is worthy of any investor’s consideration.
The point is, if you want to start nibbling on shares of quality companies like this right now, I don’t blame you one bit.
But as I said back in April 2020, don’t feel like you need to rush or that you need to get in on the exact bottom. Nobody knows what that is or what it looks like. The best thing to do is focus on opportunities where you see them and keep a patient, disciplined approach.
In the meantime, if you do find yourself looking for high-upside opportunities, then you need to check out my report of investment predictions for 2022…
While the top may be in for the tech sector, that doesn’t mean there aren’t other opportunities for mega-gains. In last year’s report, our predictions on copper, pipelines, crypto, and timber returned up to 391%…
Now, after three months of research, we’ve released a brand new set of predictions for the coming year. And if history is any guide, like last year, investors could have the chance to score major wins from ideas you won’t hear about anywhere else… Click here to learn more.